Menu

Keeping the lake house

There are several business entities allowed in the state of Ohio.The purpose of this article is to show how these entities can be used to hold title to the family vacation home or that property that everyone in the family wants to continue to ownJeff Roth for future generations. While mom and dad are alive, everyone can enjoy the vacation home with mom and dad owning title. After they are gone, suddenly four children own the property along with five grandchildren of the deceased son. Bottom line, it is just a matter of time until problems arise and either one buys out all of the rest with lifetime resentment or all are forced to sell so no one gets more than the other. Using a separate vehicle to hold title is not a guarantee of future cooperation but it allows the first generation to set the ground rules and each inherit subject to the terms of ownership. This of course will also work for the farm, the commercial property and the business.
The use of following entities will only work when absolute rules are established and clear decisions are made as to who is to be in control. Further, each family must contribute his or her financial share to maintain the property.
LIMITED PARTNERSHIP — A limited partnership is a statutory separate entity created under Ohio law. The partnership has both general and limited partners. The general partners control ALL the business operations of the partnership, while the limited partners have no control of the partnership’s business operations and have very limited or no voting rights. This allows each family unit to have one voting unit and each descendant receiving a limited partnership unit that allows ownership without control.

LIMITED LIABILITY COMPANY — An LLC is a hybrid business entity that possesses certain attributes associated with corporations and certain attributes associated with partnerships. Instead of having partners or shareholders, the LLC has members. The entity protects the member from personal liability while allowing the transfer of ownership from one generation to another by the use of a member certificates much like a stock certificate rather than a personal transfer by deed.
There are reasons to select one entity over another but that determination is too complicated to be covered in this article. For our purpose we will consider them as one alternative for the balance of the article. Since a general partner would still have personal liability, the LLC would probably be the preferred entity. The choice of entity should be discussed with both an attorney and a CPA.
WHY WOULD WE PICK A SEPARATE ENTITY TO OWN THE COTTAGE? — The number one reason is to allow many people to own a piece of the cottage without subjecting the real estate to the personal, economic and domestic problems of the succeeding generations.
CAN WE HAVE VOTING AND NON-VOTING MEMBERS? — Yes. Both entities can create Class A members who have the right to vote on all entity matters and Class B Members who have no rights to vote on any matter, or whatever limitation you want to make. Your operating agreement will establish all of the rules to follow for all members. It provides a blueprint for maintenance, control and future succession of ownership units. Many times the ownership is established by a percentage for the number of original children. If there are five children then each will have a twenty percent ownership. Each family will have one general unit and the balance of the twenty percent will be limited or nonvoting. This will allow each family to transfer ownership of their twenty percent ownership with nonvoting units while keeping the control with a small group of people.
WHAT ARE OTHER BENEFITS OF THESE ENTITIES?
1. — The entity is responsible for all taxes maintenance and liability insurance. This is important if that guest fall off of the dock. Only the entity is liable rather than each child’s assets that could be subject to a lawsuit.
2. — There are no gift tax issues as each owner is contributing their undivided interest in exchange for membership interests in the entity. They can then give this nonvoting interest to each grandchild in units and hopefully pass their entire nonvoting interest to the next generation prior to their demise and guarantee the ownership in many succeeding generations by their own estate plans. They may even be able to create discounts in valuation of the units for lack of control and marketability.
WHAT HAPPENS IF ONE PERSON WANTS OUT? — The operating agreement must have a detailed buy-sell agreement to remove any question as to who can buy and for what price. The original core family members should decide this. This will be the hardest to agree upon but will save friction and confusion if all agree at the outset on this point. Each family can repurchase within their family as to their twenty percent interest .If there is no immediate family member then another member can purchase the nonvoting unit without affecting the original ownership breakdown. The key is that no family member can attempt to sell to the public and force a sale of the property that was intended to be the piece of history that kept the original family unit together.
This method of continuation of ownership can only work if everyone works together. The entity can last for many generations but reality tends to terminate the plan in time and either allow for the whole ownership to go to one family or be
Jeff Roth is a partner with Forrest Bacon and David Bacon of the firm ROTH and BACON with offices in Port Clinton, Upper Sandusky, Marion, Ohio and Fort Myers, Fla. Contact him at This email address is being protected from spambots. You need JavaScript enabled to view it. (telephone: 419-732-9994) copyright@Jeffrey P. Roth 2011.

back to top